DOCTOR SUED FOR FRAUD IN NO-FAULT BILLING FOR CAR ACCIDENT CASES; HIS COUNTERCLAIMS DISMISSED

Court: Supreme Court, Appellate Division, Second Department, New York

Case: New York Central Mutual Insurance Co. v. McGee

Date: Aug. 16, 2011.

From: New York attorney Gary E. Rosenberg (personal injury and accident attorney and lawyer; serving Queens Bronx; Queens injury attorney)

Comment: See my FREE special report for more information about New York's No-Fault Insurance Law.

Generally when a No-Fault insurance carrier doesn't wish to pay bills from a doctor or other medical provider it issues a denial and then the ball drops into the provider's court to either sue or demand arbitration to fight to have its bill paid.

Sometimes insurance carriers choose to take the offensive, as is demonstrated by this case. Here, the plaintiff automobile insurance carrier did not want to pay No-Fault medical bills arising out of automobile accidents. The insurance company sued Dr. John McGee doctor and his 12 medical service provider companies seeking a ruling from the Court ("declaratory judgment") that it was not obligated to pay no‑fault insurance claims submitted by the doctor or his companies because (the insurance company claims) the corporations were fraudulently incorporated -- meaning that they were actually owned, operated, and controlled by unlicensed persons and their management companies in violation of applicable statutes and regulations. Basically, the claim is that Dr. McGee illegally rented out his medical license.

This appeal, however, looks like it presents a simple procedural matter. The lower court, on its own, severed (separated) certain of the doctor's counterclaims (claims back) against the plaintiff insurance company. In this appeal, the court cancels the severance of the counterclaims and puts the case back together but then dismisses the doctor's counterclaims as legally insufficient.

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The plaintiff insurance company issues automobile insurance policies in New York State which include coverage under the no‑fault insurance law (see Insurance Law ' 5101, et seq ). The plaintiff commenced this action against John McGee (hereinafter Dr. McGee), a licensed physician, and twelve professional medical service corporations owned and operated by Dr. McGee (hereinafter collectively the PCs), alleging that the PCs were fraudulently incorporated in Dr. McGee's name when they were actually owned, operated, and controlled by unlicensed persons and their management companies in violation of applicable statutes and regulations. The plaintiff seeks a judgment declaring that it is not obligated to pay outstanding and future no‑fault insurance claims submitted by the PCs on the primary theory that they were fraudulently incorporated in Dr. McGee's name to circumvent New York law prohibiting nonphysicians from sharing ownership in medical service corporations. The plaintiff also seeks declaratory relief on the alternate theories that the PCs failed to provide requested verification of their eligibility to receive no‑fault benefits, failed to attend requested examinations under oath in various actions and arbitration proceedings initiated by them to recover no‑fault benefits, and submitted bills seeking payment of no‑fault benefits for services that were not provided.

Shortly after the defendants joined issue by serving an answer with counterclaims, the plaintiff moved, inter alia, pursuant to CPLR 3211(a)(3) and (7) to dismiss the counterclaims. On the return date of the motion, the Supreme Court, sua sponte, raised the issue of severance as to the relief sought against each of the 12 PCs and, at the court's request, the parties submitted supplemental memoranda on the issue. In the order appealed from, the Supreme Court, among other things, sua sponte, severed the action as to the 12 PCs, but permitted the plaintiff to serve an amended complaint against Dr. McGee and 3 PCs of the plaintiff's choosing on a theory of fraudulent incorporation. The Supreme Court also denied those branches of the plaintiff's motion which were pursuant to CPLR 3211(a)(3) and (7) to dismiss the defendants' counterclaims, with leave to renew after joinder of issue on an amended complaint.

The Supreme Court improvidently exercised its discretion in, sua sponte, severing the action as to the 12 PCs, and, in effect, permitting the action to continue only against Dr. McGee and 3 of the 12 PCs. Although it is within a trial court's discretion to grant a severance, this discretion should be exercised sparingly (Shanley v. Callanan Indus., 54 N.Y.2d 52, 57, 444 N.Y.S.2d 585, 429 N.E.2d 104; see Curreri v. Heritage Prop. Inv. Trust, Inc., 48 A.D.3d 505, 507, 852 N.Y.S.2d 278; Lelekakis v. Kamamis, 41 A.D.3d 662, 666, 839 N.Y.S.2d 773). Severance is inappropriate where the claims against the defendants involve common factual and legal issues, and the interests of judicial economy and consistency of verdicts will be served by having a single trial (see Bentoria Holdings, Inc. v. Travelers Indem. Co., 84 A.D.3d 1135, 925 N.Y.S.2d 516; Curreri v. Heritage Prop. Inv. Trust, Inc., 48 A.D.3d at 507_508, 852 N.Y.S.2d 278; Lelekakis v. Kamamis, 41 A.D.3d at 666, 839 N.Y.S.2d 773; Naylor v. Knoll Farms of Suffolk County, Inc., 31 A.D.3d 726, 727, 818 N.Y.S.2d 460). Here, the complaint alleged the existence of a common scheme to fraudulently incorporate the PCs through the use of Dr. McGee's professional license, which, if established, would render all of the PCs ineligible to recover no‑fault benefits (see State Farm Mut. Auto. Ins. Co. v. Mallela, 4 N.Y.3d 313, 319_322, 794 N.Y.S.2d 700, 827 N.E.2d 758). The common factual and legal issues presented as to whether the 12 PCs were fraudulently incorporated predominate the action and, thus, the interests of judicial economy and consistency of verdicts would be not be served by requiring the plaintiff to commence multiple actions. To the contrary, such fragmentation would increase litigation and place an unnecessary burden on court facilities (Shanley v. Callanan Indus., 54 N.Y.2d at 57, 444 N.Y.S.2d 585, 429 N.E.2d 104), by requiring four separate trials instead of one.

Furthermore, the Supreme Court should have granted that branch of the plaintiff's motion which was to dismiss the defendants' counterclaims pursuant to CPLR 3211(a)(7). The counterclaims are predicated on the defendants' allegation that they are entitled to reimbursement for medical services provided under the medical payments coverage provisions of the subject insurance policies rather than the no‑fault coverage provisions. However, medical payments coverage is excess coverage over mandatory no‑fault coverage (see 11 NYCRR 65-1.1), and the defendants have failed to allege or otherwise demonstrate that the payments they seek exceed the no‑fault threshold of $50,000 for basic economic loss of an eligible injured person for a single accident. Since the defendants have failed to allege facts which, if true, would entitle them to recover for medical services rendered under medical payments coverage, the counterclaims fail to state a cause of action (see generally Leon v. Martinez, 84 N.Y.2d 83, 87_88, 614 N.Y.S.2d 972, 638 N.E.2d 511; Jaymer Communications, Inc. v. Associated Locksmiths of Am., Inc., 84 A.D.3d 888, 923 N.Y.S.2d 844).

The plaintiff's remaining contention that the Supreme Court should have granted that branch of their motion which was pursuant to CPLR 3211(a)(3) to dismiss the counterclaims because the defendants lacked standing to assert them is without merit.